BEYOND MARKET VERSUS STATE

A feature of the People-Centered Development Forum, Release Date April 3, 1992

by David C. Korten and Paul Ekins

It is rare to open a serious daily newspaper or news weekly without being
faced with articles predicting dire economic consequences if the current
international negotiations under the General Agreement on Trade and Tariffs
(GATT) fail to remove the world's last remaining trade barriers. Bountiful
employment and prosperity are promised if they do. Opponents of free trade are
dismissed as "protectionists" advocates of narrow special interests
and economic illiterates who lack concern for the plight of the poor and seek to
block human progress. We are reminded of the failure of state planning in
Eastern Europe, the economic achievements of the competitive market, and
theories demonstrating that trade benefits all parties. By implication we are
asked to accept that an integrated global market in which the institutions of
the market are allowed to work without restraint will create an economic
miracle. The poor will be lifted from their misery and the environment will be
preserved.

ECONOMIC MIRACLES FOR WHOM?

While some opponents of free trade are indeed narrow minded isolationists
concerned only with the protection of special interests, the reality is far more
complex than most free trade advocates admit. Furthermore, the evident failure
of command and control economic planning does not itself remove the critical
defects of the unregulated market including its tendency to accentuate divisions
between rich and poor, neglect the environmental consequences of economic
growth, erode the basis of its legitimacy and undermine democratic governance
processes.

Since the earliest days of the industrial revolution the market based
economic order has in broad terms divided the national population into three
distinct groups: 1) a beneficiary class consisting of industrialists, elite
workers and professional middle classes who benefit from the order; 2) a class
of dependent workers who have accepted their inferior power and remuneration as
a price of avoiding the ranks of; 3) those who are surplus to the industrial
system's requirements the market's "disposable people."

In the Northern industrial countries, development's presumed model for
universal prosperity, the visibility of these divisions, until recently, has
been obscured by the success of the collective bargaining of the labor union
movement and the social safety net of public welfare programs. Throughout the
1980s, however, restraints on market forces were reduced, competition among the
economic classes for a shrinking ecological resource base intensified, labor
unions particularly in North America saw their bargaining power eroded by
industrial migration to low wage countries, and social services for all but the
wealthy seriously deteriorated. As a consequence, the social divisions of market
societies have come into sharper relief as income gaps and the numbers of
economically dispossessed grow alarmingly.

For example, in 1950 people in rich nations could, on average, buy about ten
times as much as those in poor nations; by 1988 it was nearly 30 times as much.
The income gap can be nearly as great within as between countries. In Brazil the
richest 20 percent earn 28 times as much as the poorest 20 percent. In the
United States the differential is 12 times and growing.

London, founding city of the industrial revolution, experienced a fourfold
increase in the number of homeless families with children, to a total of 400,000
people. Adding London's 120,000 homeless single people brings the total to
520,000 just short of Calcutta's 600,000 street dwellers. Meanwhile, government
leaders boasted of an "economic miracle."

In Southern countries the dynamics of human disposal are particularly stark.
Often the multilateral development banks are key players. For example, 70 "development"
projects of the World Bank ongoing in 1990 would forcibly displace 1.5 million
people from their homes and livelihoods to make their lands and resources
available to benefit persons in most instances already better off economically
than those displaced. In almost every case the oustees would end up impoverished
by the "resettlement and rehabilitation" process.

With regard to the ecology, the consumer society has long depended on the
capture of an ever larger share of earth's available ecological resource base to
support the extravagance of the market's favored people. The fact that the 20
percent of the world's people who live in the Northern industrial countries
account for well over half the world's natural resource consumption and generate
a comparable share of wastes is often cited as evidence of the free market's
economic superiority. This might be a plausible interpretation in a world of
limitless resources. Unfortunately, a growing body of evidence suggests that in
the aggregate the global economy is expropriating ecological resources at a rate
that already exceeds sustainable limits. Consequently, what these high levels of
Northern consumption really demonstrate is the ability of the current market
system to concentrate economic power to the benefit of the few at the expense of
the many.

Affluence has historically been built, in part, on the ability of the
powerful to extract from the poor their rightful share of earth's ecological
surplus. In an earlier era this was the function of colonial empires. Now that
function has been passed to an international trading system sharply biased to
Northern interests.

The social legitimacy of the market system is grounded in arguments relating
to the economic efficiency of competitive markets and the rights of private
ownership. Unfortunately, as amply demonstrated by current experience, the
natural processes of the unregulated market tend to erode both. Unless
constrained by public policy, winners tend to drive losers from the market,
gradually concentrating market share in fewer and fewer corporate units until
the ultimate victors gain oligopolistic control of the market and insulate
themselves from normal competitive market forces.

This process is vividly demonstrated in the global economy by the rapid
growth of intra-corporate trade now estimated to account for 30 percent of
reported international trade. Intra-corporate trade, which is internal to an
individual corporation and governed by hierarchical dictate rather than
competitive market forces, of course, is not "trade" at all as no
market transaction is involved.

Free traders enthusiastically malign the former command-and-control
economies of Eastern Europe and the USSR. They prefer to ignore the fact that
the command-and-control economies internal to the 100 largest global
corporations exceed the GNP of more than half of the world's nation-states. In
economic terms General Motors (USA) is roughly equivalent to Austria, Royal
Dutch Shell (UK/Netherlands) to South Africa, Toyota (Japan) to Yugoslavia, and
Siemans (Germany) to Malaysia. The 91,000 employees of Daewoo (Korea) form a
corporate economy roughly equal to the GNP of the national economy of the 166
million people of Bangladesh. These giant corporations, to a large extent
creations of policies advanced in the name of the "free" market,
represent great islands of unaccountable central planning within the global
market. This allows them to wield enormous economic power when dealing with
consumers, smaller business units, or even countries external to their own
managed economies managing transactions with less powerful actors in the
external market economy to accumulate ever more economic power within their
corporate borders.

Just as the processes of market consolidation work to reduce market
competition, they also tend to shift control of capital away from its real
owners including countless small investors and pensioners to the managers and
investment bankers who control capital's use. Largely insulated from
accountability to the actual investors, these managers and bankers have proven
adept at manipulating the system to transfer the legal ownership of massive
amounts of capital into their own hands, far out of proportion to any value they
create. Unrestrained, the free market inexorably erodes the foundations of its
own legitimacy.

As disparate economies become integrated with one another, capital becomes
increasingly free to flow to the locality where production costs are lowest for
export to localities where incomes are highest. Losing its national identity,
capital transnationalizes and loses its attachment to place. If there is a
surplus of labor in the integrated economy, the balance of power between labor
and capital tilts sharply toward capital. Wages are bid down toward subsistence,
while the returns to the firm increase. Governments desperate to attract
investors find themselves bidding against one another to offer investors the
cheapest and most compliant labor; the weakest environmental, health, and safety
standards; the lowest taxes; and the most fully developed infrastructure. The
consequences can be devastating for community standards.

The argument for freeing markets of regulatory constraints must be built on
more than the failure of socialism and the proven ability of the unrestrained
market to enrich the few at the expense of the many. In fact the key to
prosperity lies in a balance of the forces of market, state, and civil society.
Long term trends have been in a contrary direction.

THE GROWTH OF STATE AND MARKET POWER

For most of the world's people, the pervasive influence of state and market
is a relatively recent phenomenon. The great majority of the "sovereign"
nation-states that now comprise the United Nations date only from the post
Second World War period. Prior to expansion of the nation-state, most of
humanity's people lived in the rural areas of non-industrial countries and built
their economic lives around resources controlled by community structures and
production for self-consumption. In other words, most human needs including
cultural, spiritual, and social needs were met by non-market institutions of
what we might now refer to as civil society. Economic self-interest was only one
of the forces at play in mediating human relationships.

The family or household was the primary economic and social unit, linked to
other such units and to place through complex webs of non-market relationships.
Then as now, those within the well functioning family unit whether nuclear,
extended, or clan shared resources among their members feeding, clothing,
sheltering, and caring for one another free of charge. When called for they made
real sacrifices for one another. More broadly, the social fabric of all
functioning human communities has incorporated mutual help mechanisms that
represent an extension of the non-market values and relationships of the
functioning family.

The point here is not to idealize traditional communities, which invariably
featured their own forms of injustice and brutality. Rather it is to point out
that imperfect as their function may be, non-market values and relationships
have long played a central role in human society and indeed are essential
elements of a healthy, prosperous community. This point is so obvious as to
scarcely merit mention, were it not for the fact that the theory of the free
market that dominates current policy thinking denies their existence and
dismisses their validity as a basis for social organization.

It is true that many modern wealth creation processes are inhibited in
settings in which non-economic values are strongly embedded for the very reason
that they inhibit unrestrained economic competition and the natural advantage it
conveys on the economically powerful. This has given the economically powerful a
substantial interest in extending the market's reach often at the cost of
sacrificing non-economic family and community ties.

Markets alone would probably have corroded the structures of community
self-reliance and mutual assistance in due course. So attractive is the carrot
proffered by the images and artifacts of the consumer society that even those
who have no objective chance whatever of benefiting tend to capitulate to its
perception of reality.

But the processes of marketization would have been far slower without the
wholesale redefinition of property rights made possible by using the powers of
sovereignty of the modern state to transfer productive assets from those who
engaged in subsistence production to those who were prepared to bring these
assets into the market system. Asset holders who resisted the carrot of
consumerism found themselves confronted by the stick of the state's confiscatory
powers as the state lay claim to untitled ancestral lands, imposed taxes that
forced subsistence producers into the market, and exercised the right of eminent
domain to claim even the titled land, water and forest resources of
predominantly subsistence producers for development projects "in the public
interest." Through such means the resources and social structures that once
gave people independence or relief from the market were ruthlessly assaulted or
sequestered; families and communities were ruptured; and water and biomass
expropriated in the name of economic efficiency and growth.

CONSOLIDATING MARKET POWER WEAKENING THE STATE

The strong state has been an important instrument for extending the market
and building a global economic elite. Now, however, the processes of market
penetration are nearly complete and the emergent global elite has become
increasingly transnationalized beyond concern for any given geographical
territory and the people contained therein. For the members of this elite the
strong state is becoming an increasingly burdensome institution.

In democratic societies the state is presumed to be accountable to and
responsible for the well-being of all its citizens many of whom may have
substantial unmet needs they are likely to demand the state meet through its
ability to reallocate the use of society's resources through non-market means.
Transnational corporations are for most practical purposes accountable to no
one, have limited responsibility for the common good, and can freely discard
tens of thousands of employees with minimal obligation. As institutional power
passes from the state to the transnational corporation the potential demand on
resources controlled by elites to care for needs of the market's casualties is
greatly reduced, if not eliminated. The elites increasingly align their
interests with those of the corporation, falling back when challenged on hollow
theoretical arguments that the trickle down of benefits from an unconstrained
market will ultimately benefit everyone.

These dynamics, now being played out on a global scale, work so clearly in
the interests of power holders that it is tempting to suggest that they are the
products of a global conspiracy. In reality the vast majority of elite power
holders have never been educated in the existence and nature of such
dynamics and for all practical purposes are largely unaware of them. They are
simply making rational short-term responses to the economic and political
pressures bearing on them according to the rules of appropriate market behavior
to which prevailing societal values have conditioned them. They are instruments
of deeper forces imbedded in the institutional structures within which they
work.

For example, under pressures to show growth in profits corporate executives
seek expanded markets, a task that is eased in the short-term by the elimination
of trade barriers. The elimination of trade barriers, however, leaves them
increasingly vulnerable to competition from other large corporations that gain
significant cost advantages from basing their facilities in localities that
offer low wages, tax holidays, friendly labor unions, and weak social and
environmental legislation. They begin to demand removal of restrictions on the
free movement of investment so they may remain "competitive" by
relocating their own facilities to the more "competitive" locations,
thus gradually bidding down social and environmental standards to the lowest
common denominator.

Through this process the ability of the state to regulate either trade or
investment flows and its ability to tax corporate profits are all seriously
eroded. The state becomes increasingly unable to manage the national economy,
provide basic social services, and discharge its responsibilities to protect
environmental resources for future generations. Political leaders of the
weakened state apparatus, increasingly dependent on corporate contributions to
finance their election campaigns, come to see the public interest as equivalent
with the corporate interest and abet even applaud the erosion of their own
functions. The consolidation of power in the institutions of transnational
capital proceeds seemingly unrestrained.

Still another consequence of the systematic erosion of the state's powers to
regulate, tax, and confiscate property is to reduce the prospect that an
awakened populace might launch a successful democratic movement to use those
powers to break up non-competitive command-and-control corporate economies and
restore competitive structures and regulatory frameworks in the name of economic
justice and market accountability. Intended or not, this is another consequence
of the application by the G-7 governments and the Bretton Woods institutions
(the World Bank, IMF, and GATT) of the instruments at their command, including
international treaty mechanisms such as the GATT, to advance policies that
weaken the state's ability to manage and regulate national economies in the
broader public interest. The agreements being pressed by the G7 countries would
embed the rights of transnational corporations vis a vis local economies into
international treaties, effectively abrogating the rights of the people of an
individual nation to govern the functioning of their own economies in their
self-defined interest. The fact that most of the negotiations involved are
carried out in secret and so much effort is expended to avoid public debate such
as the fast-track authority George Bush obtained from the U.S. Congress does
lend weight to those inclined to argue that a conscious conspiracy against the
broader public interest is involved.

INSTITUTIONAL PLURALISM GROUNDED IN A STRONG CIVIL SOCIETY

Free trade advocates seldom call attention to the difference between the
competitive-regulated market economies that produced the West's success and
free-unregulated markets such as those that have left U.S. tax payers with a
$500 billion bill for bailing out a plundered savings and loan industry.
Similarly neglected is the difference between fair and balanced trade between
strong national economies, and trade that is merely free within a global system.
What free traders are advocating is in both instances the latter dismissing the
very concept of a national economy and further weakening the remaining
constraints on political, military and economic forces that already seriously
distort market mechanisms in favor of the economically powerful.

While the market is often touted as the necessary companion of democracy,
this claim holds true only for the competitive-regulated market. Unbridled
power, whether that of the unaccountable state or the unregulated market, is the
enemy of democratic accountability, justice, peace, and ecological
sustainability. The unregulated market leads to unbridled market power. The
human interest is poorly served by a tyranny of either the state or the market.

Unfortunately, too much of the contemporary economic debate centers on a
choice between extremes the state or the market as though these were society's
only options. Almost wholly neglected in the current debate is the fairly
obvious reality that a well functioning modern society depends on the
countervailing powers of a strong accountable government and a strong
competitive market each serving its distinctive role in the service of the
public good.

Maintaining this balance in the public interest, however, depends on a third
force that both socialist and capitalist economic theory have neglected. A
strong and dynamic civil society must bring the citizenry into direct and active
involvement in the continuing political process of articulating the public
interest and demanding accountability to itself.

So long as the development debate centers on the question of whether the
state or the market is best able to deliver development to the people, society
will be the worse for the prescriptions offered. A wrongly defined question
seldom produces a useful answer. The locus of development action must reside
with the people. The roles of state and the market must both be subordinated to
the power and initiative of civil society the people in whom the only legitimate
sovereignty resides.

The recent movement from authoritarian to democratic structures of
governance is justly applauded. However, it tends to mask counter trends of
equal or possibly even greater importance: the growing strength of unregulated
market forces, a shifting allegiance of democratic political systems from the
people's interest to corporate interests, and a weaken of the state as an
effective instrument for managing society's affairs in the public interest. When
well intentioned people herald this process as a harbinger of democracy's
growing hegemony they confuse market freedom, which is a freedom of the rich and
powerful, with democratic freedom, which is the freedom of all people.

The current assault on the instruments that make meaningful market
regulation possible is an assault on the earth's ecology and human society's
social fabric that runs increasingly out of human control and threatens the very
survival of human life and civilization. So far the institutions of the state
and the market have demonstrated little propensity or capacity for appropriate
and effective corrective action. To the contrary, their "leaders" have
become captives of the market driven reward structures of the organizations they
head and of the simplistic theories that legitimate these structures.

Negotiations such as those of the GATT must be based on a framework grounded
in a recognition of the finite nature of the world's ecological resources, the
priority claim of the disenfranchised for resources to meet their basic needs,
the need for local economic control and accountability, the importance of
anti-trust action to maintain conditions of market competition, the essential
role of market regulation, and the importance of fairness and balance in trade
relationships. These are hardly radical concepts, yet they seem radical within
the current context because they are so alien to the ill-conceived ideologies
that currently dominate the global policy process including the GATT
negotiations.

A "successful" outcome to the GATT negotiations based on a
self-destructive ideological framework is likely to significantly worsen and
already rapidly deepening global crisis. Better that these negotiations be
placed on hold until progress is made toward a more suitable framework.

Because of the current incapacity of the institutions of both state and
market, constructive action toward placing the GATT negotiations on hold and
forging viable alternatives to the prevailing framework depends on what is
currently the weakest of the institutional sectors, civil society. The human
future depends on the ability of this neglected sector to energize and coalesce
its energies into a massive social movement to end the current war of humanity
against itself.

Such a movement is now emerging out of a consolidation of the forces of the
environmental, human rights, social justice, peace, feminist, and other
constructive social movements. It seeks a life-centered transformation of human
values and institutions consistent with economic justice, ecological
sustainability, and social inclusiveness in part through establishing the
accountability of both state and market. It is demonstrating a growing power to
meld social forces that transcend class, race, and national boundaries.

Some maintain that a transnationalizing civil society is in the early stages
of birth with a potential to become society's dominant institutional force. They
see it as humanity's primary hope. We agree.

David C. Korten is a fellow of the PCDForum and a visiting professor of the
Asian Institute of Management. Paul Ekins is a research fellow, Department of
Economics, Birkbeck College, University of London, and a contributing editor of
the People-Centered Development Forum.